Matheson Electronics has just developed a new electronic device that it believes will have broad market appeal. The company has performed marketing and cost studies that revealed the following information:

a. New equipment would have to be acquired to produce the device. The equipment would cost $150,000 and have a six-year useful life. After six years, it would have a salvage value of about $18,000.

b. Sales in units over the next six years are projected to be as follows:

Year	Sales in Units
1	7,000
2	12,000
3	14,000
46	16,000

c.

Production and sales of the device would require working capital of $47,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the projects life.

d.

The devices would sell for $60 each; variable costs for production, administration, and sales would be $45 per unit.

e.

Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $151,000 per year. (Depreciation is based on cost less salvage value.)

f.

To gain rapid entry into the market, the company would have to advertise heavily. The advertising program would be:

Year

Amount of Yearly Advertising

12

$

76,000

3

$

56,000

46

$

46,000

g.	The companys required rate of return is 6%.

Use a spreadsheet to calculate the present value of the cash flows.

Required:
Part1.	Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from sale of the device for each year over the next six years.

	Year 1	Year 2	Year 3	Year 4-6
Sales in units	7,000	12,000	14,000	16,000
Sales in dollars
Variable expenses
Contribution margin
Fixed expenses:
Salaries and other
Advertising
Total fixed expenses
Net cash inflow (outflow)

Part

2-a.

Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment. (Any cash outflows should be indicated by a minus sign.)

	Now	1	2	3	4	5	6
Cost of equipment
Working capital
Yearly net cash flows
Release of working capital
Salvage value of equipment
Total cash flows
Present value
Net present value

Part

2-b.	Would you recommend that Matheson accept the device as a new product? Yes or No